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Joint Venture Risks That are Often Overlooked

With credit still tight and sureties still cautious, more and more contractors are considering joint ventures as a way to get their businesses moving again. By combining skills, experience and financial resources, construction companies may be able to bid on larger projects, acquire needed skills or expertise, increase their financing or bonding capacity, or expand into new markets or industry segments.

For all the potential advantages, though, a joint venture can also expose your company to new types of risk. Some may seem obvious – such as disputes over project management authority or decision-making, or an unfair distribution of risks and rewards between the partners.

Other hazards may not be so apparent, however. For example, here are two joint venture challenges that even experienced contractors often overlook:

Cash flow issues
While the purpose of many joint ventures is to alleviate financial pressures, a joint venture can actually introduce new financial problems, especially in the critical area of cash flow. Most contractors are accustomed to using the proceeds from one project to help cover their expenses on the next. But when properly structured, a joint venture is a completely separate entity, with no other revenue sources to draw on.

Moreover, joint venture partners are not likely to recoup their initial investment until the project is completed. The reason is retainage, that portion of contract billings the building owner holds in reserve pending satisfactory completion of all contract terms.

Because retainage on a project often exceeds profit, joint venture partners should be prepared to have their cash tied up in material costs, labor and other expenses for the duration of the project. This could diminish their ability to take on other projects in the meantime.

Bookkeeping and reporting bottlenecks
Accounting requirements are often an afterthought until year-end, when companies need audited financial statements to comply with regulatory or lender requirements. Many joint ventures lack the accounting resources to provide timely audited numbers to feed into the individual partners’ year-end accounting.

This may seem like a mundane concern – especially when your attention is diverted by the prospect of winning a desirable contract – but it can become a major cause of friction later. One good way to prevent this problem is to delegate the joint venture’s bookkeeping duties to a qualified independent service, rather than relying on accounting resources from the joint venture partners.

Beyond these two specific concerns, of course, a joint venture can present broader challenges as well. When considering a joint venture, look for a partner who puts a premium on working through such matters beforehand. The more you resolve questions up front, the less tension will arise after the job is underway.